The U.S. Federal Reserve on December 16 raised its benchmark Federal funds rate for the first time since 2006, marking the start of its first monetary tightening cycle in more than a decade. A year ago, the Fed ended its unprecedented "quantitative easing" program, which quintupled the size of its balance sheet to roughly $4.5 trillion. In anticipation of Wednesday's move, market volatility has ticked up noticeably as investors sought to re-price assets in a slightly less accommodative world.

Fears capital would flow back into the United States in response to the Fed's quarter-point tightening—effectively off zero—have driven the volatility. But the shift in Fed policy has clearly been anticipated, based on the significant appreciation of the dollar since mid-2014 and the sustained strength of U.S. Treasuries—notwithstanding the rate hike expectations and even amid sales of U.S. sovereign bonds by other central banks, including the Bank of Japan and the People's Bank of China (PBOC).

Despite the Fed's shift, it should be noted that U.S. monetary policy remains extraordinarily accommodative with the target rate range now at 0.25% to 0.5%. The Fed's guidance, which is arguably more important than this highly anticipated, yet marginal rate hike, also makes clear that the world's most important central bank will remain in go-slow mode. As stated in its announcement: "Economic conditions will evolve in a manner that will warrant only gradual increases in the Federal funds rate," which "is likely to remain, for some time, below levels that are expected to prevail in the longer run." Moreover, given the widespread expectations that the Fed's "lift-off" would begin at this meeting, much has already been discounted in current asset prices, not just dollar-strengthening, as noted above, but big drops in commodities prices and emerging market assets. Lastly, while the United States is finally tightening monetary policy, the rest of the world's major central banks maintain more accommodative stances, which should help offset the impact of the Fed's hike. And, as we noted in a previous post on Fed rate normalization, were the Fed to tighten too quickly, the resulting dollar strengthening and its growth- and inflation-dampening effects would certainly prompt a reversal, or at the least a slowing in the pace of monetary tightening.

Continued monetary accommodation in the United States and elsewhere should support global growth, including in emerging markets, which have suffered significant capital outflows. The Institute of International Finance (IIF), which represents many of the world's largest financial firms, estimates $540 billion in net emerging market outflows in 2015, marking the first net flight of capital from emerging markets since 1988. The shift involved both non-resident inflows sliding to below 2008 levels as well as increasing resident outflows. "As a share of EM gross domestic product (GDP), capital inflows have fallen to about 2% from a record high of almost 8% in 2007," the IIF noted.

The main drivers behind those outflows are slowing EM growth rates of late. And while many investors have expressed legitimate concern about higher levels of EM corporate and sovereign debt in aggregate, they should remember relative debt levels within emerging markets vary sharply, and household debt overall is quite low. As with developed markets, investors need to differentiate between emerging markets, which are still generally growing at twice the pace of advanced economies.

Given faster emerging market growth and asset valuations now at their lowest levels in decades, we believe excellent opportunities exist for longer-term investors willing to take a differentiated look at select developing country stocks. That's especially true now that the Fed has finally taken its first step toward interest rate normalization, alleviating much of the uncertainty that has weighed on global markets, including emerging markets.

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Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Danan Kirby is a portfolio specialist for Thornburg Investment Management. He works with Thornburg’s investment team and serves as a liaison for the team and key investment decision makers, communicating process and results of the firm’s investment strategies. Danan joined Thornburg in 2016.

Prior to Thornburg, Danan served as portfolio manager for the Strategic Growth Bancorp family of banks, managing various strategies for institutions and individual investors. Before that, he was a financial institution specialist with the FDIC. He is also a veteran of the U.S. Army. Danan graduated summa cum laude from the University of New Mexico’s Anderson School of Management with a BBA, concentrating in finance.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Josh Rubin is a client portfolio manager for Thornburg Investment Management. He works with Thornburg’s investment team, serving as a liaison for the team and key investment decision makers and communicating process and results of the firm’s investment strategies. He joined Thornburg in 2017.

Before joining Thornburg, Josh worked on the global equity investment team at Driehaus Capital Management in Chicago where he held several roles, including portfolio manager of the global equity strategy, portfolio manager of the U.S. large-cap and U.S. mid-cap equity strategies, and senior analyst covering emerging markets. Josh also spent over seven years at Marsico Capital Management in Denver, where he was a co-portfolio manager of the emerging markets fund and a senior analyst covering global companies across sectors. He began his career in finance as an investment banker in the fixed income division at George K. Baum & Company in Denver.

Josh holds a BSFS in international politics from the Walsh School of Foreign Service at Georgetown University.

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Danan Kirby is a portfolio specialist for Thornburg Investment Management. He works with Thornburg’s investment team and serves as a liaison for the team and key investment decision makers, communicating process and results of the firm’s investment strategies. Danan joined Thornburg in 2016.

Prior to Thornburg, Danan served as portfolio manager for the Strategic Growth Bancorp family of banks, managing various strategies for institutions and individual investors. Before that, he was a financial institution specialist with the FDIC. He is also a veteran of the U.S. Army. Danan graduated summa cum laude from the University of New Mexico’s Anderson School of Management with a BBA, concentrating in finance.

Stephen Jimenez is a client portfolio manager for Thornburg Investment Management. He focuses on Thornburg’s liquid alternative strategy and serves as a liaison between the investment team and clients.

Prior to joining Thornburg, Stephen was a salesperson at III Capital Management, a $4 billion hedge fund management company focused on rates and credit strategies. He also held various positions in the alternative asset management industry, including Coast Investment Management, a $7 billion fund of hedge funds. His roles included global product specialist and hedge fund analyst, focused on fixed income relative value strategies. Earlier in his career he was a U.S. Treasuries market maker and arbitrageur at major Wall Street firms, including Bank of America and UBS.

Stephen attended the University of Washington, where he graduated with a BA in economics. He is currently registered with FINRA with a Series 7 and 66.

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, Charles was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He had previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia.

Charles earned BA degrees from the University of Colorado at Boulder and an MA from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Charlie Wilson is portfolio manager for Thornburg Investment Management. He joined the firm in 2012 as ­associate portfolio ­manager and was promoted to portfolio manager in 2014.

Charlie earned a BS in geology from the University of Arizona in Tucson and a PhD in geophysics from the University of Colorado in Boulder. Prior to joining Thornburg, Charlie served as co-portfolio manager for Marsico Capital Management in Denver, Colorado. He was responsible for portfolio investments across multiple strategies and geographies, with specialization in materials, energy, technology, and payments sectors.

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